Small Cap Value Report (9 May 2017) - G4M, TET, WTM

9th May '17 by Paul Scott

17 comments 13331 reads

Good morning! It's Paul here.

Today's report will be a quick early post, which I'm doing now. Then more detail added later, this afternoon. The reason for this is because I'm heading into central London in a moment, to attend the G4M analyst meeting. So I'll report back to you about that later. Please note that G4M is my 2nd largest personal long position - so clearly I am biased in favour of the company, or I wouldn't have bought so many shares in it!

Waterman (LON:WTM) - congratulations to holders here, as a recommended 140p cash offer has just been announced. It's a share I've covered extensively before, so nice to see a decent outcome for shareholders. It's interesting to see that the bidder is Japanese. I seem to recall that another Japanese company bid for some other UK building consultancy company, but can't remember the name. If any readers can recall that, maybe you could drop a comment in below this article?

Gear4Music (LON:G4M)

Share price: 620p (up 3.7% at 11:15 - likely to be volatile today)
No. shares: 20.2m
Market cap: £125.2m

(at the time of writing, I have a long position in this share)

Preliminary unaudited results - for year ended 28 Feb 2017.

I've been covering this company for about 14 months now. Reading the archive to refresh my memory, it's interesting how my view on it has greatly changed. Initially I saw it as just a low margin box-shifter. However, several game-changing announcements last autumn - of stellar growth being achieved, and European expansion, made me much more bullish.

Meeting management last year also helped. Meeting management isn't complicated for me, as I'm only really looking for one thing - entrepreneurs. It doesn't matter to me if the presentation is a bit wobbly in places, as giving presentations is a completely different skill set from creating a successful business. Management seemed more relaxed & confident today than when I saw them last year. I suppose that having floated in Jun 2015, they're familiar with the whole process now. Plus, reporting on good progress must be quite enjoyable.

First some numbers & my comments;

Revenues up 58% to £56.1m - this is stellar growth, and is all organic. I don't think it pays to over-analyse the precise figures, because there are several overlapping factors at work - e.g.…

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tony akram

9th May '17

In terms of WTM for those holding the shares on the basis there seems very little upside is the general consensus you are best to sell now and cash in just in case the deal may not go through or worth holding for bidder unlikely in my view.?

I have a very small holding for what is worth I have sold this morning at 1.39

Would appreciate other opinions

drvodkaquickstep

Hi Paul

The other company was BDP (used to be called Building Design Partnership) and they were acquired by Nippon Koei last year.

http://www.bdp.com/en/latest/news/2016/bdp-and-nippon-koei-to-unite/

Waterman management intimated that an Asian bidder was likely to come forward for further UK listed companies in this sector; clearly they may not have anticipated the target as being themselves!

I have been accumulating WTM since around 37p in 2012 and they are my largest holding (circa 20%) so I am of course delighted by this outcome. Well done to all holders.

This offer values WTM at around 7.5 EV/EBITDA based on 2018 numbers but less than 0.5 x sales. Sector average M&A is typically at 0.6 x sales (min) upwards to 1 x sales so I see scope here for a counter offer up to 200p. WSP (Canadian) have openly stated they are looking to increase headcount by 8000 staff this year and WTM would fit neatly into their UK business.

I am holding on for now.

cholertonandrew

Hi Paul, that's a really good write up on G4M thanks for sharing. I don't personally own any of the stock but it's really useful as a read across for other situations too. Well done on finding it early and knowing it well enough to believe that it deserved a strong valuation. Regards, Andrew

Ramridge

Re. £G4M Having sold out in Feb 2017 to lock in the gains and amid fear of a slowdown in sales, I have bought back this morning at 6% less (net of all expenses). Why?
Without re-hashing a number of points made above by Paul, there are 3 main conclusions I have reached
1. the financial results are very strong to outstanding. The operating margin could be better but it will undoubtedly rise as volumes increase. ROCE is 20%, but perhaps the more appropriate ROCE (Greenblatt) is 35%
2. With pure internet businesses and platform businesses, the key drivers of value are in my opinion what G4M call the commercial KPI's. Website visits, conversion rates, average order value, active customers, etc. I think they should add Trustpilot rating to this list of KPI as a measure of customer satisfaction. Comparing these to last year's they are all showing strong growth.
3. Finally, management are clearly showing that they can grow this company is a controlled and sustainable manner. The execution risk seems well managed.

All IMO and PDYOR

crystal tipps

Hi Paul

I'm also very keen on £G4M and the (relatively small) position I've built up since last year had taken a bit of a pounding over recent months. I was however convinced that the business model and management team know their onions. The result today have confirmed that I was right to hang on.

In addition to Boohoo.Com (LON:BOO) I think you could easily replace £G4M with Fevertree Drinks (LON:FEVR) in your write up and get to the same conclusions. Good growth, niche market, great prospects, sensible management. Long Term Hold.

Thank for the write up - excellent as always.

Crystal Tipps

abtan

The thing that spooked me with the £G4M update today was the static YOY cash balance & increase in debt.

I'm aware that the company is cash generative and that cash has been used productively for investments/inventory/etc..., but to continue their rapid growth I imagine they'll need a lot more capital in the short term, especially if they are to stock up their new distribution centres (and they'll still need to pay back the new HSBC loan, even if the interest payments are covered for 12 months).

I don't have much knowledge of the levels of debt funding that might be open to them in their current circumstances. Does anyone have any idea if taking on more debt would be an easy option? Or am I completely missing the point and this is a non-issue?

For the avoidance of doubt I sold out this morning after a nice run and will watch from the sidelines for now.

Abtan

mammyoko

CTI Engineering turnover acquirer of Waterman (LON:WTM) seems to be only £22m

Mammy

http://www.ctie.co.jp/ir/pdf/Securitiesreport2016.pdf

£294m t/o last year.

Information on CTI

CTI is the oldest of Japan's top three ranked major (source: Nikkei Construction) consulting engineering companies, tracing its history back to the foundation of its predecessor entity, Zaidan Hojin Kensetsu Gijutsu Kenkyusho (the Construction Technology Institute), in 1945. CTI has had a full listing on the Tokyo Stock Exchange since 1996 (stock code 96210). CTI has worked and continues to work closely with both national and local governments in Japan as a consulting engineer on major infrastructure projects, including dams, bridges and roads. In addition to its offices in Japan, CTI has offices in Islamabad, Yangon, Phnom Penh, Jakarta, Manila, Ulaanbaatar, Wuhan, Guangzhou and Bishkek, and has worked on infrastructure projects in Asia, Africa and Central America. CTI's orders for overseas projects accounted, on average, for 8 per cent. of its total orders in the last three years. Currently, CTI does not undertake any business in Europe. CTI's ten year strategic plan, known as "Clavis 2025", has an objective of diversifying CTI from its reliance on national and local government contracts in Japan and expanding into works for foreign governments, multi-national development banks and private sector clients both inside and outside of Japan.

The CTI Group employed 2,195 people as at 31 December 2016 and for the financial year ended 31 December 2016 had annual turnover of ¥42.0 billion (£294 million) and made a net profit of ¥1.4 billion (£9.8 million). In 2016 CTI generated 36 per cent. of its orders from the water and land sector, 31 per cent. from the transport and urban sector, 25 per cent. from the environmental and social sector and 8 per cent. from overseas.

Further information on CTI can be found on its English language website at www.ctie.co.jp/english/.

dscollard

Cheered by the update from Redstoneconnect (LON:REDS) this am on the acquisition of a specialist Audio Visual and Meeting room management company, Anders and Kerns for £1.4m which was funded by a placing using a rapid book build of £6.6m this am at 1.5p (3% discount to the 8 May close price). The remainder of the cash from the placing will be used to advance their OneSpace platform.

Redstoneconnect (LON:REDS) have since RNS'd that the placing was oversubscribed by their current instis which is always reassuring although it was 21% of the float

I like this company a lot and see it having enormous potential especially given the quality of its current client base but moreover the total addressable market in using IoT for building and facilities management.

flat on the day following an initial 5% drop which I took advantage of . It is however a high spec microcap so caveats abound ..

Julianh

Hi Paul
Thanks again for alerting me to G4M. I did my own research, watched for a bit and then bought a few months ago. These results look really good, as is your write up of them.
Any chance you could have a short look at Cambrian Automobiles (CAMB). The results look good though weighed down by the investments in new and enhanced properties. But the market still seems to be sceptical about CAMB. Are we still expecting a major downturn as a result of Brexit?
So far I am up 15% this year to date and 30% over the last 12 months, even with a large weighting in fixed interest (as protection in case things go wrong). Without you and without Stockopedia I would not be doing nearly as well.
Thank you

dustyie

Hi Paul
Domain name company CentralNic (AIM: CNIC) reported earnings for 2016 this moring

and just wondering have you or graham , had time to look at this morning results ,

thank you

ricky65

So Treatt (LON:TET) is 40% of Lord Lee's ISA. He likes living dangerously then - just one black swan event from a big drawdown.

underscored

Depends on his tolerance and capacity for risk I guess.

Treatt (LON:TET) Massive sales volume today!

peterg

18th May '17

G4M placing just announced:

http://www.investegate.co.uk/gear4music--g4m-/rns/proposed-placing/201705181649315963F/

Gear4music (Holdings) plc ("Gear4music", "Company" or "Group"), the largest UK based online retailer of musical instruments and music equipment, announces its intention to conduct a placing ("Placing") of up to 610,000 new ordinary shares ("New Shares") to raise gross proceeds of up to £4.2 million for the Company. It is intended that the price at which the New Shares are to be issued ("Placing Price") will be 690 pence per New Share. The New Shares will be issued on a non-pre-emptive basis, within the Company's existing share allotment authorities.

At 690p I raising some cash for investment and to strengthen the balance sheet seems fine to me.

But also:
The Placing also comprises the proposed placing at the Placing Price of, in aggregate, up to 839,000 existing ordinary shares ("Sale Shares", together with the New Shares, "Placing Shares"), to be sold by certain of the Company's Directors in response to high levels of demand from institutional investors. Andrew Wass, Gear4music's Chief Executive Officer, who intends to sell a proportion of his holding of Ordinary Shares as part of the Placing, has agreed to a 12 month lock-in period in respect of his remaining holding.

A handy way for the CEO to sell some of his at a good price. The bit about "high levels of demand" is I guess obligatory!

However, overall I'd say it's positive news - and a placing at 690 is not to be sniffed at.

Peter

tads

Be interesting to see what the share price does tomorrow.

willhampson

I think the very slight discount is excellent news. If the placing is oversubscribed, which I'm pretty certain it will be, then I think you'll see a very good response in the share price. Unfortunately for me, I decided to take profits several days ago...

Small Cap Value Report (9 May 2017) - G4M, TET, WTM

Gear4Music (LON:G4M)

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Paul Scott

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